UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2022

or

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     .

Commission File Number: 001-36061

Benefitfocus, Inc.

(Exact name of registrant as specified in its charter)

Delaware	46-2346314
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

100 Benefitfocus Way

Charleston, South Carolina 29492

(Address of principal executive offices and zip code)

(843) 849-7476

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.001 Par Value	BNFT	Nasdaq Global Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:  

☐	Large accelerated filer	☒	Accelerated filer	☐	Non-accelerated filer
☐	Smaller reporting company	☐	Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

As of August 1, 2022, there were approximately 34,236,552 shares of the registrant’s common stock outstanding.

Benefitfocus, Inc.

Form 10-Q

For the Quarterly Period Ended June 30, 2022

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS		3
Unaudited Consolidated Balance Sheets as of June 30, 2022 and December 31, 2021		3
Unaudited Consolidated Statements of Operations and Comprehensive Loss for the Three and Six Months Ended June 30, 2022 and 2021		4
Unaudited Consolidated Statements of Changes in Stockholders' Deficit for the Three and Six Months Ended June 30, 2022 and 2021		5
Unaudited Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2022 and 2021		6
Notes to Unaudited Consolidated Financial Statements		7
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		22
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		32
ITEM 4. CONTROLS AND PROCEDURES		33
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS	34
ITEM 1A. RISK FACTORS		34
ITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS		34
ITEM 6. EXHIBITS		36
SIGNATURES		37

2

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Benefitfocus, Inc.

Unaudited Consolidated Balance Sheets

(in thousands, except share and per share data)

	As of June 30, 2022			As of December 31, 2021
Assets
Current assets:
Cash and cash equivalents	$	51,497		$	31,001
Marketable securities		–			37,049
Accounts receivable, net		22,342			16,491
Contract assets		12,815			18,051
Prepaid and other current assets		20,743			9,564
Total current assets		107,397			112,156
Property and equipment, net		26,048			27,202
Financing lease right-of-use assets		50,391			56,474
Operating lease right-of-use assets		669			774
Intangible assets, net		18,988			21,134
Goodwill		34,237			34,237
Deferred contract costs and other non-current assets		7,283			8,864
Total assets	$	245,013		$	260,841
Liabilities, redeemable preferred stock and stockholders' deficit
Current liabilities:
Accounts payable	$	5,298		$	10,565
Accrued expenses		17,546			9,451
Accrued compensation and benefits		11,557			16,411
Deferred revenue, current portion		27,808			27,756
Lease liabilities and financing obligations, current portion		6,387			7,378
Contingent consideration		–			675
Total current liabilities		68,596			72,236
Deferred revenue, net of current portion		2,464			2,377
Convertible senior notes		119,962			107,281
Lease liabilities and financing obligations, net current portion		74,184			75,758
Other non-current liabilities		372			313
Total liabilities		265,578			257,965
Commitments and contingencies
Redeemable preferred stock:
Series A preferred stock, par value $0.001, 5,000,000 shares   authorized, 1,777,778 and 1,777,778 shares issued and outstanding   at June 30, 2022 and December 31, 2021, respectively,   liquidation preference $45 per share as of June 30, 2022 and December 31, 2021, respectively		79,193			79,193
Stockholders' deficit:
Common stock, par value $0.001, 95,000,000 shares authorized,    34,172,079 and 33,460,545 issued and outstanding at June 30, 2022 and December 31, 2021, respectively		34			33
Additional paid-in capital		382,204			431,874
Accumulated deficit		(481,996	)		(508,224	)
Total stockholders' deficit		(99,758	)		(76,317	)
Total liabilities, redeemable preferred stock and stockholders' deficit	$	245,013		$	260,841

The accompanying notes are an integral part of the Unaudited Consolidated Financial Statements.

3

Benefitfocus, Inc.

Unaudited Consolidated Statements of Operations and Comprehensive Loss

(in thousands, except share and per share data)

	Three Months Ended June 30,						Six Months Ended June 30,
	2022			2021			2022			2021
Revenue	$	56,587		$	60,904		$	117,812		$	125,967
Cost of revenue		29,095			28,030			58,981			56,623
Gross profit		27,492			32,874			58,831			69,344
Operating expenses:
Sales and marketing		10,643			10,921			20,567			21,812
Research and development		12,249			11,103			23,406			21,935
General and administrative		13,517			13,571			22,806			23,433
Impairment of lease right-of-use assets		1,769			4,003			1,769			4,003
Change in fair value of contingently returnable consideration		(719	)		–			(719	)		–
Restructuring costs		–			2,727			1,006			4,127
Total operating expenses		37,459			42,325			68,835			75,310
Loss from operations		(9,967	)		(9,451	)		(10,004	)		(5,966	)
Other income (expense):
Interest income		72			54			84			111
Interest expense		(2,476	)		(5,646	)		(4,958	)		(11,201	)
Other income		236			64			482			22
Total other expense, net		(2,168	)		(5,528	)		(4,392	)		(11,068	)
Loss before income taxes		(12,135	)		(14,979	)		(14,396	)		(17,034	)
Income tax expense		29			41			45			83
Net loss		(12,164	)		(15,020	)		(14,441	)		(17,117	)
Preferred dividends		(1,600	)		(1,600	)		(3,200	)		(3,200	)
Net loss available to common stockholders	$	(13,764	)	$	(16,620	)	$	(17,641	)	$	(20,317	)
Comprehensive loss	$	(12,164	)	$	(15,020	)	$	(14,441	)	$	(17,117	)
Net loss per common share:
Basic and diluted	$	(0.40	)	$	(0.50	)	$	(0.52	)	$	(0.62	)
Weighted-average common shares outstanding:
Basic and diluted		34,028,422			33,080,257			33,764,103			32,787,162

The accompanying notes are an integral part of the Unaudited Consolidated Financial Statements.

4

Benefitfocus, Inc.

Unaudited Consolidated Statements of Changes in Stockholders’ Deficit

(in thousands, except share and per share data)

	Common Stock,				Additional						Total
	$0.001 Par Value				Paid-in			Accumulated			Stockholders'
	Shares		Par Value		Capital			Deficit			Deficit
Balance, December 31, 2021		33,460,545	$	33	$	431,874		$	(508,224	)	$	(76,317	)
Cumulative effect adjustment from adoption of new accounting standard		–		–		(52,973	)		40,669			(12,304	)
Issuance of common stock upon vesting of restricted stock units		60,572		–		–			–			–
Stock-based compensation expense		–		–		1,189			–			1,189
Preferred dividends		–		–		(1,600	)		–			(1,600	)
Net loss		–		–		–			(2,277	)		(2,277	)
Balance, March 31, 2022		33,521,117	$	33	$	378,490		$	(469,832	)	$	(91,309	)
Issuance of common stock upon vesting of restricted stock units		650,962		1		(1	)		–			–
Stock-based compensation expense		–		–		5,315			–			5,315
Preferred dividends		–		–		(1,600	)		–			(1,600	)
Net loss		–				–			(12,164	)		(12,164	)
Balance, June 30, 2022		34,172,079	$	34	$	382,204		$	(481,996	)	$	(99,758	)
	Common Stock,				Additional						Total
	$0.001 Par Value				Paid-in			Accumulated			Stockholders'
	Shares		Par Value		Capital			Deficit			Deficit
Balance, December 31, 2020		32,327,439	$	32	$	427,431		$	(476,058	)	$	(48,595	)
Exercise of stock options		15,000		1		154			–			155
Issuance of common stock upon vesting of restricted stock units		173,731		–		–			–			–
Stock-based compensation expense		–		–		1,523			–			1,523
Preferred dividends		–		–		(1,600	)		–			(1,600	)
Net loss		–		–		–			(2,097	)		(2,097	)
Balance, March 31, 2021		32,516,170	$	33	$	427,508		$	(478,155	)	$	(50,614	)
Exercise of stock options		9,250		–		102			–			102
Issuance of common stock upon vesting of restricted stock units		704,543		–		–			–			–
Issuance of common stock under Employee Stock Purchase Plan, or ESPP		4,823		–		65			–			65
Stock-based compensation expense		–		–		4,376			–			4,376
Preferred dividends		–		–		(1,600	)		–			(1,600	)
Net loss		–		–		–			(15,020	)		(15,020	)
Balance, June 30, 2021		33,234,786	$	33	$	430,451		$	(493,175	)	$	(62,691	)

The accompanying notes are an integral part of the Unaudited Consolidated Financial Statements.

5

Benefitfocus, Inc.

Unaudited Consolidated Statements of Cash Flows

(in thousands)

	Six Months Ended June 30,
	2022			2021
Cash flows from operating activities
Net loss	$	(14,441	)	$	(17,117	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation and amortization		13,462			12,525
Stock-based compensation expense		6,504			5,899
Accretion of interest on convertible senior notes		377			5,780
Interest accrual on finance lease liabilities		22			3,244
Rent expense less than payments		(54	)		(27	)
Change in fair value of contingently returnable assets		(719	)		–
Non-cash accretion income from investments		29			506
Impairment or loss on disposal of right-of-use assets and property and equipment		1,769			4,048
Changes in operating assets and liabilities:
Accounts receivable, net		(5,851	)		1,354
Accrued interest on investments		284			(101	)
Contract, prepaid and other current assets		4,016			2,410
Deferred costs and other non-current assets		1,582			1,249
Accounts payable and accrued expenses		(6,025	)		3,520
Accrued compensation and benefits		(4,853	)		(4,907	)
Deferred revenue		139			(615	)
Other non-current liabilities		60			159
Net cash (used in) provided by operating activities		(3,699	)		17,927
Cash flows from investing activities
Purchases of investments held-to-maturity		–			(48,427	)
Proceeds from short-term investments held-to-maturity		–			48,000
Maturities of investments available-for-sale		22,045			–
Sales of investments available-for-sale		14,691			–
Business combination, net of cash acquired		(500	)		–
Purchases of property and equipment		(3,911	)		(4,483	)
Net cash provided by (used in) investing activities		32,325			(4,910	)
Cash flows from financing activities
Payments of preferred dividends		(3,200	)		(3,200	)
Payments of contingent consideration		(675	)		–
Proceeds from exercises of stock options and ESPP		–			322
Payments on financing obligations		(2	)		(224	)
Payments of principal on finance lease liabilities		(4,253	)		(2,559	)
Net cash used in financing activities		(8,130	)		(5,661	)
Net increase in cash and cash equivalents		20,496			7,356
Cash and cash equivalents, beginning of period		31,001			90,706
Cash and cash equivalents, end of period	$	51,497		$	98,062
Supplemental disclosure of non-cash investing and financing activities
Property and equipment purchases in accounts payable and accrued expenses	$	52		$	–

The accompanying notes are an integral part of the Unaudited Consolidated Financial Statements.

6

BENEFITFOCUS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

1. Organization and Description of Business

Benefitfocus, Inc. (the “Company”) provides a leading cloud-based benefits management platform for consumers, employers, health plans (also known as insurance carriers) and brokers that is designed to simplify how organizations and individuals transact benefits. The financial statements of the Company include the financial position and operations of its wholly owned subsidiaries, Benefitfocus.com, Inc., BenefitStore, LLC (formerly, BenefitStore, Inc.) and Tango Health, Inc.

2. Summary of Significant Accounting Policies

Principles of Consolidation

These consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in the consolidation. The Company is not the primary beneficiary of, nor does it have a controlling financial interest in, any variable interest entity. Accordingly, the Company has not consolidated any variable interest entity.

Interim Unaudited Consolidated Financial Information

The accompanying unaudited consolidated financial statements and footnotes have been prepared in accordance with GAAP as contained in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (the “Codification” or “ASC”) for interim financial information, and with Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the interim financial information includes all adjustments of a normal recurring nature necessary for a fair presentation of the results of operations and comprehensive loss, financial position, changes in stockholders’ deficit and cash flows. The results of operations and comprehensive loss for the three- and six-month periods ended June 30, 2022 are not necessarily indicative of the results for the full year or for any other future periods. These unaudited consolidated financial statements should be read in conjunction with the audited financial statements and related footnotes for the year ended December 31, 2021 included in the Company’s Annual Report on Form 10-K, as amended.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. Such estimates include allowances for credit losses and returns, valuations of deferred income taxes, long-lived assets, capitalizable software development costs and the related amortization, contingent consideration, incremental borrowing rate used in lease accounting, the determination of the useful lives of assets, and the impairment assessment of right-of-use assets, acquired intangibles and goodwill. Additionally, as described in revenue and deferred revenue below, estimates are utilized in association with revenue recognition, in particular the estimation of variable consideration using the expected value method from insurance broker commissions reported in Platform revenue. Determination of these transactions and account balances are based on, among other things, the Company’s estimates and judgments. These estimates are based on the Company’s knowledge of current events and actions it may undertake in the future as well as on various other assumptions that it believes to be reasonable. Actual results could differ materially from these estimates.

Restructuring Costs

Restructuring costs are comprised of one-time severance charges, continuation of health benefits and outplacement services and are presented separately in operating expenses in the consolidated statements of operations and comprehensive loss. The Company recorded restructuring costs of $1,006 and $ 1,400 from a reduction to its workforce during January 2022 and 2021, respectively. In June 2021, the Company recorded restructuring costs of $2,727 from the elimination of the office of the executive chairman of the board of directors.

Revenue and Deferred Revenue

The Company derives its revenue primarily from fees for subscription services and professional services sold to employers and health plans as well as platform revenue derived from the value of products sold on its platform. Revenue is recognized when control of these services is transferred to customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those services. Taxes collected from customers relating to services and remitted to governmental authorities are excluded from revenue.

The Company determines revenue recognition through the following steps:

• Identification of each contract with a customer;

• Identification of the performance obligations in the contract;

• Determination of the transaction price;

7

• Allocation of the transaction price to the performance obligations in the contract; and

• Recognition of revenue when, or as, performance obligations are satisfied.

Software Services Revenue

Software services revenue consists of subscription revenue and platform revenue.

Subscription Revenue

Subscription revenue primarily consists of monthly or annual subscription fees paid to the Company by its employer and health plan customers for access to, and usage of, cloud-based benefits software solutions for a specified contract term. Fees are generally charged based on the number of employees or subscribers with access to the solution.

Subscription services revenue is generally recognized on a ratable basis over the contract term beginning on the date the subscription services are made available to the customer. The Company’s subscription service contracts are generally three years.

Subscription revenue also includes fees paid for other services, such as event sponsorships and certain data services.

Platform Revenue

Platform revenue is generated from the value of policies or products enrolled in through the Company’s marketplace.  Platform revenue from insurance carriers is generally recognized over the policy period of the enrolled products. In arrangements where the Company sells policies to employees of its customers as the broker, it earns broker commissions. Revenue from insurance broker commissions and supplier transactions is recognized at a point in time when the orders for the policies are received and transferred to the insurance carrier or supplier and is reduced by constraints for variable consideration associated with collectability, policy cancellation and termination risks.

Professional Services Revenue

Professional services revenue primarily consists of fees related to the implementation of software products purchased by customers.  Professional services typically include discovery, configuration and deployment, integration, testing, and training. Fees from consulting services and support services are also included in professional services revenue.

The Company determined that implementation services for certain of its health plan customers significantly modify or customize the software solution and, as such, do not represent a distinct performance obligation. Accordingly, revenue from such implementation services with these health plan customers are generally recognized over the contract term of the associated subscription services contract, including any extension periods representing a material right. In certain arrangements, the Company utilizes estimates of hours as a measure of progress to determine revenue.

Revenue from implementation services with employer customers is generally recognized as those services are performed.

Revenue from support is recognized over the service period.

Contracts with Multiple Performance Obligations

Certain of the Company’s contracts with customers contain multiple performance obligations. For these contracts, the individual performance obligations are accounted for separately if they are distinct. The Company allocates the transaction price to the separate performance obligations based on their relative standalone selling prices. The Company determines the standalone selling prices based on its overall pricing objectives, taking into consideration market conditions and other factors, including the value of its contracts, the subscription services sold, customer size and complexity, and the number and types of users under the contracts.

Contract Costs

The Company capitalizes costs to obtain contracts that are considered incremental and recoverable, such as sales commissions.  Payments of sales commissions generally include multiple payments. The Company capitalizes only those payments made within an insignificant time from the contract inception, typically three months or less.  Subsequent payments are expensed as incurred. The capitalized costs are amortized to sales and marketing expense over the estimated period of benefit of the asset, which is generally four to five years. The Company expenses the costs to obtain a contract when the amortization period is less than one year. Capitalized fulfillment costs are reviewed for impairment if changes to customer contracts result in termination or partial termination of services. Deferred costs related to obtaining contracts are included in deferred contract costs and other non-current assets.

The Company capitalizes contract fulfillment costs directly associated with customer contracts that are not related to satisfying performance obligations. The costs are amortized to cost of revenue expense over the estimated period of benefit, which is generally five years. Deferred fulfillment costs are included in deferred contract costs and other non-current assets.

The following tables present information about deferred contract costs:

Balance of deferred contract costs As of June 30, 2022